In 1972 Gratuity Formula, the parliament passed a bill for payment of gratuity. As per the law, Gratuity is given to an employee of a government or private sector company by his employer. The gift is nothing but a bonus given to the employee for being loyal to the company and staying for a more extended period. Gratuity is paid to an employee at the time of his retirement if he has successfully fulfilled more than five years or before departure in case of death or severe bodily injury.
As per the law, when an employee renders service with their employer uninterruptedly for five years, he is eligible for the gratuity. But their service can be interrupted on account of the sickness of the employee, on account of an accident, leave, layoff, strike, lockout, cessation due to an employee’s fault or absence from duty without pre-approved or informed leave.
Earlier when the
bill passed, the gratuity limit was ten lakhs. But recently parliament of India
exceeded the limit to 20 Lakhs. This new gratuity limit is applicable for both
private as well as government sectors. An employer can choose to pay the
employee anywhere between 10 Lakhs to 20 Lakhs. But gratuity amount more than
20 Lakhs is taxable as per the bill.
This limit of 20
Lakhs applied to an integrated amount that received from one or more employer
in the same or different years.
This new ceiling
of 20 Lakhs for gratuity was effective from 29th March 2018.
For the company
to be eligible to give a gratuity to their employee, their workforce strength
must be more than ten counts. It is important to note here the company hits the
mark of 10 employees, then they are eligible to offer gratuity. It doesn’t
matter then if the workforce reduces, the company will still be able to provide
a bonus to loyal employees.
For the employee
to be eligible for the same, he must have rendered his services to the company
for at least five years. Contract workers and temporary staff also covered
under this bonus, and they are also eligible to claim the bonus if they have
worked with the company for more than five years. Employees that have
transferred to different cities or countries are also available for the gift.
However, apprentices are not eligible for gratuity. The probation period can
also count in the five years of experience.
Gratuity is paid
to the employee by their employer at the time of:
On death or
disablement due to an accident or a disease
How is Gratuity calculated
For an employee
who works below the ground (like mining), the year in which the employee has
worked for more than 190 days, is considered as one year.
For the employee
who works above the ground, the year in which the employee works for more than
240 working days counted as one whole year.
Hence, if the
employee has worked for days less than specified above, such days are not
counted towards gratuity.
For example, if
an employee has worked with a company for four years and eight months, the
duration is considered as five years, but if he has worked in the company for four
years four months the term is not calculated as five whole years, and the
employee will not be eligible for gratuity.
The formula for
calculating gratuity is as below:
Gratuity = Last drawn salary *fifteen/twenty-six* No
of completed years of service.
received by the employee during his years of working with the same company is
taxable. However, if the employee has received the gratuity upon retirement,
death, or superannuation.
Tax benefits for
that of an employee working with a private sector company are different than
those of working in the public or government sector.
Tax benefits for Government Employees
For public sector or government officers, defense
officers or employees in local authority any Gratuity received during death or
retirement is entirely tax-free
Tax Benefits for Private Sector employees
For private sector employees, under the payment of gratuity act 1972
exemption is offer up to:
Rs 20 Lakhs
Actual gratuity received
Generally, salary consists of multiple components like Basic, DA, HRA, Bonus, Commission, Allowancesfiveand Perquisites. Before calculating the gift, one needs to be aware of the definition of salary, which defined in the gratuity bill. As per the statement for gratuity, coverage salary includes Basic salary and Dearness Allowance. While the government has so much to offer the employees when they retire, it is essential for one as an individual to make smart investments so that they can spend later years of their lives without any worry. You can consider investing in FD using the funds accumulated through gratuity as they are a safe and secure option. With NBFCs like Bajaj Finance, you can even get a higher interest rate than most banks and many other attractive benefits.